SALE OF GOODS: CERTAINTY OF TERMS: WHETHER TERMS AMOUNTED TO 'AGREEMENTS TO AGREE': PROPER APPROACH TO CONSTRUCTION AND IMPLICATION OF TERMS WITHIN CONTRACT WHICH CONTAINS TERMS LEAVING MATTERS TO BE SUBSEQUENTLY AGREED

The Court of Appeal, affirming the judgment at first instance [fn.1], held that the Sellers (EMC) had an enforceable obligation to deliver copper concentrate to the Buyers, notwithstanding that the sale contract had left the dollar amount of the Treatment Charge (TC) and the Refining Charge (RC), as well as the shipping schedule, to be subsequently agreed between the parties. The Court of Appeal approved the trial court’s approach to construction and implication of the terms of the contract and concluded that a term was to be implied to the effect that the TC/RC and shipping schedule should be reasonable and, in the event of any failure to agree the appropriate charges and schedule, the dispute was to be determined by arbitration.

The Appellant (“EMC”) and the Respondent (“MRI”) were parties to a contract dated 28 June 2005 (the “2005 Contract”) under which EMC was to sell copper concentrate to MRI. Disputes arose between the parties, but the nature of these disputes is unknown. The parties referred their disputes to arbitration (the “First Arbitration”), which was terminated by the parties entering into a Settlement Agreement dated 30 January 2009 (the “Settlement Agreement”).

The Settlement Agreement provided for “new, separate contracts between EMC and MRI” and, pursuant to that clause, the parties entered into three new contracts, each dated 30 January 2009. EMC argued that the third of these contracts (the “2010 Contract”) was unenforceable because it left three matters (the shipping schedule, the amount of Treatment Charge and the amount of Refining Charge) to “be agreed... during the negotiation of terms for 2010”. This dispute was referred to arbitration (the “Second Arbitration”) resulting in an award dated 3 February 2012 (the “Award” or “Tribunal's Award”).

The Tribunal concluded that, as a matter of construction, EMC's delivery obligation was “non-existent”, since the 2010 Contract had “left material terms as 'agreements to agree”. On appeal by MRI to the Commercial Court, Eder J held [fn.1] that the language of the Settlement Agreement and the 2010 Contract (including the language of the three clauses which left certain matters to be agreed) indicated that the parties intended EMC to have a legal obligation to deliver, notwithstanding the three matters to be subsequently agreed between the parties. EMC appealed against Eder J's decision, on the grounds that, when the parties failed to agree on these matters, the lack of subsequent agreement rendered the sale agreement too uncertain to be legally binding.

Judgment

In considering the appeal, the Court of Appeal set out the relevant principles to be applied in determining whether an agreement was too uncertain to be legally binding. These principles were also considered by the Tribunal and Eder J, and – the Court of Appeal confirmed - should be the starting point for any determination of the enforceability of a contract for want of certainty. The first set of principles was summarised by Rix LJ in Mamidoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD [fn.2]:

“69. In my judgment the following principles relevant to the present case can be deduced from these authorities, but this is intended to be in no way an exhaustive list:

i) Each case must be decided on its own facts and on the construction of its own agreement. Subject to that,

ii) Where no contract exists, the use of an expression such as "to be agreed" in relation to an essential term is likely to prevent any contract coming into existence, on the ground of uncertainty. This may be summed up by the principle that "you cannot agree to agree".

iii) Similarly, where no contract exists, the absence of agreement on essential terms of the agreement may prevent any contract coming into existence, again on the ground of uncertainty.

iv) However, particularly in commercial dealings between parties who are familiar with the trade in question, and particularly where the parties have acted in the belief that they had a binding contract, the courts are willing to imply terms, where that is possible, to enable the contract to be carried out.

v) Where a contract has once come into existence, even the expression "to be agreed" in relation to future executory obligations is not necessarily fatal to its continued existence.

vi) Particularly in the case of contracts for future performance over a period, where the parties may desire or need to leave matters to be adjusted in the working out of their contract, the courts will assist the parties to do so, so as to preserve rather than destroy bargains, on the basis that what can be made certain is itself certain…

vii) This is particularly the case where one party has either already had the advantage of some performance which reflects the parties' agreement on a long term relationship, or has had to make an investment premised on that agreement.

viii) For these purposes, an express stipulation for a reasonable or fair measure or price will be a sufficient criterion for the courts to act on. But even in the absence of express language, the courts are prepared to imply an obligation in terms of what is reasonable.

ix) Such implications are reflected but not exhausted by the statutory provision for the implication of a reasonable price now to be found in section 8(2) of the Sale of Goods Act 1979 (and, in the case of services, in section 15(1) of the Supply of Goods and Services Act 1982).

x) The presence of an arbitration clause may assist the courts to hold a contract to be sufficiently certain or to be capable of being rendered so, presumably as indicating a commercial and contractual mechanism, which can be operated with the assistance of experts in the field, by which the parties, in the absence of agreement, may resolve their dispute.”

The second set of relevant principles were stated by Chadwick LJ in BJ Aviation Ltd v Pool Aviation Ltd [fn.3]:

“19. It is unnecessary, and would be superfluous, to review those authorities again in this judgment. It is I think sufficient to identify five propositions which, as it seems to me, are not capable of dispute.

20. First, each case must be decided on its own facts and on the construction of the words used in the particular agreement. Decisions on other words, in other agreements, construed against the background of other facts, are not determinative and may not be of any real assistance.

21. Second, if on the true construction of the words which they have used in the circumstances in which they have used them, the parties must be taken to have intended to leave some essential matter, such as price or rent, to be agreed between them in the future—on the basis that either will remain free to agree or disagree about that matter—there is no bargain which the courts can enforce.

22. Third, in such a case, there is no obligation on the parties to negotiate in good faith about the matter which remains to be agreed between them—see Walford v. Miles [1992] A.C. 128, at page 138G.

23. Fourth, where the court is satisfied that the parties intended that their bargain should be enforceable, it will strive to give effect to that intention by construing the words which they have used in a way which does not leave the matter to be agreed in the future incapable of being determined in the absence of future agreement. In order to achieve that result the court may feel able to imply a term in the original bargain that the price or rent, or other matter to be agreed, shall be a “fair” price, or a “market” price, or a “reasonable” price; or by quantifying whatever matter it is that has to be agreed by some equivalent epithet. In a contract for sale of goods such a term may be implied by section 8 of the Sale of Goods Act 1979. But the court cannot imply a term which is inconsistent with what the parties have actually agreed. So if, on the true construction of the words which they have used, the court is driven to the conclusion that they must be taken to have intended that the matter should be left to their future agreement on the basis that either is to remain free to agree or disagree about that matter as his own perceived interest dictates there is no place for an implied term that, in the absence of agreement, the matter shall be determined by some objective criteria of fairness or reasonableness.

24. Fifth, if the court concludes that the true intention of the parties was that the matter to be agreed in the future is capable of being determined, in the absence of future agreement, by some objective criteria of fairness or reasonableness, then the bargain does not fail because the parties have provided no machinery for such determination, or because the machinery which they have provided breaks down. In those circumstances the court will provide its own machinery for determining what needs to be determined—where appropriate by ordering an inquiry (see Sudbrook Trading Estate Ltd v. Eggleton [1983] A.C. 444).”

The Court of Appeal held that, despite having considered these principles, the Tribunal had erred in finding that “the contract in question is to be construed in the light of its own wording”, and in finding that “it [was] clear that there had been no part performance [by MRI]”. The Court of Appeal considered the 2010 Contract as part of a wider arrangement, which comprised the termination of the First Arbitration, the parties entering into the Settlement Agreement, and the parties entering into three contracts pursuant to the Settlement Agreement, amongst which was the 2010 Contract. The terms of the 2010 Contract were therefore to be construed within this context. The lack of certainty of those terms did not render the 2010 Contract unenforceable since a term was to be implied “that the TC/RC and shipping schedule shall be reasonable, and in the event of any dispute as to the appropriate charges and schedule the dispute is to be determined by arbitration”. The Court of Appeal had three reasons for this conclusion.

First, both parties had already derived benefits under the wider arrangement. The present case was thus analogous to principle (vii) in Mamidoil: the 2010 Contract had been entered into by the parties as part of their Settlement Agreement, and MRI had compromised its claim by terminating the First Arbitration, while EMC derived the “full benefit of the abandonment of MRI's claim”. To hold that EMC had no delivery obligation would render the quid pro quo for the settlement of MRI's claim “in effect, illusory”.

Second, the Court was inclined to preserve the parties' bargain. The 2010 Contract was “part of a wider agreement between the parties, which wider arrangement the parties had for some time, here for over one year, been acting upon... without any suggestion that the [2010 Contract] fell into a different and unenforceable category of obligation”. This was reflected in principles (v) and (vi) of Mamidoil: in the present case, the Settlement Agreement and two other contracts had come into existence as part of a 'wider arrangement', and the 2010 Contract merely contemplated future performance over a period, while the rest of the 'wider arrangement' was workable and had indeed worked for the parties for over one year. Given these facts, the Tribunal “should have approached the construction of the 2010 Contract so as to preserve rather than destroy the parties' bargain”.

Third, the parties could not have intended that there would be no obligation to sell under the 2010 Contract, based on the language used by the parties in both the Settlement Agreement and the 2010 Contract. Tomlinson LJ agreed entirely with Eder J's finding that the parties clearly intended the 2010 Contract to be legally binding.

As to the appropriate relief in the circumstances, the Court of Appeal upheld Eder J's decision to set aside the Award, as opposed to remitting it to the Tribunal, holding that there was “no scope for remission” given Eder J's finding that “no reasonable tribunal correctly applying the relevant legal principles could have reached the conclusion that the contract was unenforceable”.